The Future of Exchanging Value Uncovering New Ways of Spending

The future of exchanging value Uncovering new ways of spending Our relationship with merchants has moved away from the cash register and we now stand at the edge of a dramatic shift in where, when and how we exchange value. Organisations that cannot work with regulators to engender trust in their solution’s operation or follow the consumer-merchant relationship and provide payment solutions that are not instantaneous and ubiquitous, risk being left behind b Dynamics of the Australian Superannuation System The next 20 years: 2011 – 2030 Contents Exchanging value 1 When we exchange value 4 – Why do some payment solutions succeed, while others fail? 6 Where we exchange value 7 How we exchange value 10 – Thriving in a challenging retail landscape 14 The future of exchanging value 15 – The future of payments providers 16 – Regulation in a more complex environment 18 References 19 About the authors 20 Dynamics of the Australian Superannuation System The next 20 years: 2011 – 2030 1 The future of exchanging value Exchanging Value Consumer behaviour is changing. Where, when and how people purchase the goods they need is evolving, as new technologies and business models remove the need for conventional commercial interactions between customers and merchants. Consumers are making their purchases when and where they discover their need, rather than engaging in a traditional shopping mission to seek out the goods, and often bypassing conventional payments solutions in the process. This might be as simple as clicking the Buy Now button at the end of an online book review, instead of noting the title with the intention of seeking the book later. It could involve using points from one company’s loyalty program to rent a movie from a second company, with the movie streamed direct to the consumer’s television. Or it may be more complex, moving the transaction from the physical world into a virtual social network shared by vendor and customer. Consumers are choosing to transact when, where and how it is most convenient to them. Payments are moving away from the cash register and the PoS terminal. New payment models and systems are emerging that have the potential to disrupt current payment technologies and organisations. Using a range of low-cost, off-the-shelf services and technologies, retailers and consumers are knitting together ‘good enough’ solutions that are more convenient and efficient than established payment offerings. 1 The future of exchanging value Emerging payment solutions promise to provide simpler and more efficient means of exchanging value by Early in the day, you arrive at the train allowing transactions to be conducted in the context station and join the queue at the coffee and currency that is most convenient. The ability to tie transactions to a social context shared by consumers cart. Realising that you’re in the queue, and retailers also has the potential to improve customer the vendor pings you via your smart phone loyalty and retention. Potential losers in this transition may be the existing payment providers, finance institutions and asks if you would like your regular and telecommunications organisations, as lower-cost alternatives allow customers and retailers to bypass order. By the time you reach the front of established payments infrastructure. the queue your order is ready. You simply While the potential for disruption is high, the role of pick up your coffee, tap your phone against sovereign currencies and established payment solutions is secure in the short to mid term; any shift in consumer the vendor’s terminal, and you’re on your behaviour will be gradual due to the need for consumers to develop a level of trust in these alternative payment way to work methods. However, growing adoption of alternative platforms and currencies is driving us to take a more Imagine a scene as trivial as buying your morning coffee. nuanced view of payments. What is interesting about this scenario is that it can be imagined without conventional payment infrastructure, Organisations need to look beyond traditional, narrowly established or planned. Location awareness might come defined payment platforms and consider their customers’ from Google Latitude1 or foursquare2. The payment broader job they want done. What is needed is a can be affected via a smartphone- or tablet-based customer-centric approach centred on simplifying the mobile payment solution from PayPal or Square3, customer’s purchase by ensuring that the right payment while the transaction itself might be denominated in a solutions is available at the right place and time. Payment complementary currency, such as Facebook Credits4, solutions need to be perceived as instantaneous by their Bitcoin5, or points accrued via a customer users, allowing consumers to exchange value and then loyalty program. move on with their day, whether they are interacting with an established merchant to simply standing on the kerb The two sides of any payment are clearance and splitting a bill with friends after an evening meal. The settlement. During clearance the participants in the solutions need to be ubiquitous, allowing customer and transaction exchange details, which are examined and merchant to transact at the far end of the store or deep compared to ensure that the orders to buy and sell in the aisles just as easily as if they’re both standing next are allowed to proceed. Next, in settlement, the debt to the till. And finally, these solutions need to be open, is extinguished through the exchange of something both in their implementation and governance, so that of value. consumers can understand and develop trust in these Start-ups are creating new, novel clearance solutions, new ways of exchanging value. allowing merchants and their customers to identify The introduction of these new payment solutions will each other based on their respective memberships in change not just how we capture and manage payments, online services and social media platforms, and use but rather it will also influence how we account for and this identification as the basis to approve a transaction. audit payments, and how we manage the risk associated Other organisations are offering new settlement with the increased use of complimentary currencies, mechanisms, allowing a transaction to be completed by such as points from loyalty programs and the credits transferring funds in a complementary currency. associated with gift cards and emerging social media Individually these new clearance and settlement solutions payment mechanisms. In the background is the risk, work with conventional payments systems and regulation. for all stakeholders, of new regulatory regimes driven by Together they have the potential to provide us with new governments’ need to provide a safe environment for mechanisms to effect payments that are currently outside consumers and to protect tax revenues. the frameworks managed by the central banks, such as the Reserve Bank of Australia. The future of exchanging value 2 Price comparisons would be between first and second, or fourth and fifth. What we’re seeing now is a consumer who shops either on price, or on quality – the number one premium, or the retail price point. All the middle brands have gone Sue Morphet, CEO PacBrands6 3 The future of exchanging value When we exchange value The balance of power in commercial relationships has shifted from businesses to consumers. The growth of the Internet and the businesses that ply their trade on this channel provide consumers with the unprecedented ability to compare products and suppliers from anywhere around the globe, and to source the products they want from whichever business will give them the best deal. This has flattened the playing field, changing the nature of how consumers make decisions. Prior to online retailing there would often be five or six similar products on the supermarket shelf, starting with the most expensive premium brands and working down to the house brands. Consumer choice was restricted An increasing number of visitors to Australian shopping to the options available locally, a choice based on the centres are only interested in browsing before making information presented to consumers by the retailer. their purchases elsewhere. Macquarie Equities Research Consumers can now reach around the globe and access found that eighteen per cent of visitors to shopping information on how and where to secure the best centres prefer to window shop at centres before making possible product and deal to suit their needs. Now they the final purchase on the Internet. For a growing are sourcing the lowest price, or the highest quality (at minority of consumers shopping centres are becoming the best price), from a global market. entertainment rather than shopping destinations. Discount Internet-only retailers are using lightweight, The boundaries between the online and offline worlds is low-cost business models to deliver products direct to blurring as companies blend the two retail experiences. consumers at price points dramatically below those Apple, for example, opened its own chain of retail stores, of their traditional bricks-and-mortar competitors. providing a physical presence that enables customers While traditional retailers are closing stores as they see to play with their products, becoming familiar with sales contract, many online and direct-to-consumer them before buying them through the channel that is businesses, are seeing double-digit growth7. most convenient. The future of exchanging value 4 The blending of offline and online payments is changing the way consumers transact. The shopping mission, A teenager has been the search through high street retailers for the products admiring her friend’s we need, is in decline as consumers move from being search-driven to being opportunity-driven. Rather sports shoes, investigating than undertaking a mission to procure a product or different styles while they service, or to solve a defined need, consumers are buying impulsively once they realise that they have the were window-shopping opportunity to fulfil a need which they may (or may not) have previously thought that they had, using the payment during their last trip to the mechanisms available where they are at the time.

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